Scientific Game

Wakey Wakey

There’s more to Asian casino gaming than just Macau and Singapore. Could South Korea, the sleeping giant of the Asian casino industry, be about to get an alarm call?

Monday, 01 November 2010 15:51
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Macau and Singapore’s casino industries naturally attract the most attention from analysts and gaming journalists because of the scale of the investments made in them and the potential returns to be had on those investments.

There is, however, another market that doesn’t get as much coverage but that could be a sleeping giant. It’s South Korea. Unlike much-hyped Japan, South Korea actually has casinos. Indeed, the country was a trailblazer in the regional history of casino liberalisation. The first one opened in Incheon—South Korea’s third-largest city in the northwest of the country—in 1965. That was only three years after Stanley Ho’s monopoly began in Macau. After Incheon came Sheraton Walker hill in Seoul, in 1968. Then there was a 13-year hiatus until Paradise Casino—located at Haeundae Beach at the port city of Busan in the south of the country—opened in 1981.

Since then, the market has expanded to 17 casinos, 16 of them for foreigners only—mainly junket players from Japan and China, complemented by a sprinkling of Koreans who have access to a foreign passport. According to a paper from Singapore-based DBS Vickers Research published in February, sales for the foreigners-only casinos grew fivefold between 2000 and 2010, hitting 1 trillion won (US$895 million). That’s impressive, but imagine how much more the Korean industry could be realising if the market were opened up fully to locals.

In 2009, the locals’ casino, Kangwon Land out in the wilds of Gangwon-do province in the northeast of the country, generated gross revenue of KRW1.2 trillion (US$1 billion) all by itself.

In the absence of an opening up of the domestic market, one way to drive further growth of the foreigners’ casino venues might be via travel packages linked to the Meetings, Incentives, Conventions and Exhibitions market. South Korea has many virtues, but being a natural holiday destination for foreigners isn’t one of them. It’s expensive, plus it’s freezing in the winter and oppressively humid in the summer. Unless Korea’s casino market is further opened up to locals, then it could lose a significant part of its income in a matter of a few years if Japan ever gets round to legalising casinos.

Kangwon Land’s performance is proof of the latent demand for casino gaming from the natives. Sources inside the country inform IAG that the casino is so popular among South Koreans that hard-up pensioners with time on their hands arrive early at Kangwon Land to occupy seats at the crowded tables, and then charge eager gamblers arriving later up to US$700 for those seats on the weekend.

Expansion scheme

Kangwon Land has plans to expand by 2012. But there are political sensitivities domestically around any such expansion. In October last year, the Korea Times reported that from the time Kangwon Land opened in 2000, it had faced 23 lawsuits from Korean nationals claiming rebates on combined losses of KRW53.8 billion (US$50 million). In particular, some of the litigants claimed the casino management had broken its own rules on responsible gambling.

One customer, identified only as Jeong, claimed the casino coerced him to keep coming back despite his heavy losses by granting him irregular favours, such as allowing him to place bets over the set limit. While such claims by losing players are familiar to casino executives around the world, in South Korea they apparently still have the power to sway opinion among the public and, by extension, politicians.

The history of casino liberalisation in other markets such as the United States suggests, however, that in general the process is a one-way street. Once it begins, it’s very difficult to roll back, short of a Cuban-style political and social revolution. The one-way street theory seems to be confirmed in South Korea’s case by rumours that a second casino will be opened up to local players—possibly by 2012.

According to sources spoken to by IAG, the front-runner to house this second ‘locals’ casino is Jeju-do an island off the southern tip of the country. Jeju is thought to be favoured because it’s even harder to reach than Kangwon Land.

Life’s not so good

Jeju already has eight casinos. It’s frankly too many in a market catering only for foreign tourists. In 2007, for example, five million South Koreans visited Jeju, but casino owners had the frustration of sitting and watching them come and go without once setting foot on their gaming floors.

Since 2006, Jeju has had the autonomy to grant visa-free access to citizens of mainland China, but those people also need a visa to leave China, and that may not always be forthcoming. Opening the Jeju market to Koreans, therefore, could be the answer to many prayers. But the devil will be in the detail of how it is done. Were only one open-access casino to be allowed, it would create a catfight among the current operators, who will naturally all feel they have the right to a share of the action. An alternative might be for the existing operators to join in a consortium, to convert or if necessary upgrade and expand an existing property for domestic players. Another possibility is that Jeju’s autonomous government invites an outside company to develop and manage a new facility. That doesn’t look too attractive an idea, because as an all-comers property, it could also cannibalise the existing foreign visitor market. A third and more radical option would be to open up the whole of the existing Jeju market to Koreans, creating the country’s own ‘mini Macau’. That could be a do-able and equitable solution for the industry, given that all the Jeju properties are boutique in scale. When the inventory of Jeju’s eight casinos is combined, it amounts to around 300 slot machines and 150 tables. Kangwon Land, meanwhile, contains 960 video slots and 132 tables.

Second front

The possibility of South Korea opening a second ‘front’ in the casino liberalization ‘war’ and the location for it being Jeju was reported by IAG back in August 2008 in our story ‘Jeju’s Renaissance’. The Korean government’s thinking seems to be that Jeju’s relative remoteness will make it a politically acceptable choice of location for further liberalisation. There is certainly some evidence from the Las Vegas market of a relationship between ease of access and frequency of visit. Research quoted recently by Michael Chen, former President Asia, Harrah’s Entertainment Inc, suggests that people who live within an hour’s drive of Las Vegas are willing to go there for leisure purposes at least ten times a year. Make it a two-hour flight and the number of trips drops to three per annum. Allowing Koreans to gamble in Jeju would have the twin benefits of supporting the local economy while putting off the most impulsive Korean gamblers from regularly splashing their cash there.

 

Korea’s Advantage

It has a head start on Taiwan and Japan

If possession is nine-tenths of the law, as some attorneys maintain, then South Korea already has a tremendous advantage over both Japan and Taiwan in terms of having a functioning and developing casino industry. Both of the latter countries have spectacularly failed to make any progress in casino liberalisation, despite many years talking about it (in fact, several decades of talking in the case of Taiwan).

There have been a number of practical and structural changes in the Korean casino market recently that seem to indicate the government is thinking more seriously about leveraging what it has, rather than looking the other way and pretending the industry didn’t exist. An ambivalent approach appeared to characterize government policy on casinos in earlier years, with annual caps placed on casino revenue on several occasions. But having seen the roaring success of Macau and now Singapore, and with an ageing population, South Korea has recently been looking around for ways to create fresh economic growth and bring in fresh forms of taxation income. Taking advantage of the country’s existing casino infrastructure by opening it up incrementally to local players, and doing so ahead of any liberalisation plans by neighbouring jurisdictions, could have many benefits. As well as providing taxation revenue from duty raised on gambling, the opening up of the market to locals could generate the sort of cash that will allow the operating companies to invest further in new infrastructure. Already, several of them have teamed up with clinics and private hospitals to promote medical tourism from more expensive countries such as Japan, or ones with more patchy medical infrastructure, such as China.

That fresh investment can only happen on any scale if the casino industry has unequivocal political support from the country’s leadership. The first sign of a thawing in the government’s attitude has been its willingness to allow the state owned operators to become more commercially focused and more independent in the way they are run. In November 2009, Grand Korea Leisure (GKL), a state enterprise that operates three casinos (two in Seoul and one in Busan) under the Seven Luck brand, was allowed to float 30% of its stock on the Seoul bourse. As a sign of its growing confidence in the future of the industry, GKL spent KRW8.3 billion (US$7.1 million) on refurbishing VIP facilities at its flagship Seven Luck property at Gangnam in Seoul.

GKL also revamped its casino at the Millennium Hotel Seoul Hilton. The new look property, with extra seating, new Singapore, and with an ageing population, South Korea has recently been looking around for ways to create fresh economic growth and bring in fresh forms of taxation income. Taking advantage of the country’s existing casino infrastructure by opening it up incrementally to local players, and doing so ahead of any liberalisation plans by neighbouring jurisdictions, could have many benefits. As well as providing taxation revenue from duty raised on gambling, the opening up of the market to locals could generate the sort of cash that will allow the operating companies to invest further in new infrastructure. Already, several of them have teamed up with clinics and private hospitals to promote medical tourism from more expensive countries such as Japan, or ones with more patchy medical infrastructure, such as China.

That fresh investment can only happen on any scale if the casino industry has unequivocal political support from the country’s leadership. The first sign of a thawing in the government’s attitude has been its willingness to allow the state owned operators to become more commercially focused and more independent in the way they are run. In November 2009, Grand Korea Leisure (GKL), a state enterprise that operates three casinos (two in Seoul and one in Busan) under the Seven Luck brand, was allowed to float 30% of its stock on the Seoul bourse. As a sign of its growing confidence in the future of the industry, GKL spent KRW8.3 billion (US$7.1 million) on refurbishing VIP facilities at its flagship Seven Luck property at Gangnam in Seoul.

GKL also revamped its casino at the Millennium Hotel Seoul Hilton. The new look property, with extra seating, new games and new décor, opened on 6th September this year.

Changes are also afoot in the South Korean gaming equipment market. In June BMM Compliance, a global gaming machine testing company based in Australia, set up South Korea’s first gaming device test centre in partnership with Dongseo University and iReal Inc, a technology development company.

This was significant because previously, suppliers wishing to sell into the local market had to undergo a testing procedure overseen by the government that was unique to Korea, regardless of whether that kit had already been approved for major markets such as Las Vegas or Australia by one of the internationally-recognised compliance companies.

Because of the relatively small number of units sold into the Korean market annually compared to Macau, some equipment manufacturers had found the extra layer of local compliance a significant barrier to entry. BMM’s presence means it can advise the government on how to develop a set of standards that have international as well as local resonance. In July, Gaming Laboratories International, the world’s largest gaming compliance and gaming equipment testing company, hired a new development representative to work with suppliers and regulators in the Korean marketplace.

Growing game

Kangwon Land, currently the only one of South Korea’s 17 casinos open to locals, is planning a major expansion of its gaming facilities, to be completed by March 2012. But in a graphic illustration of the delicate job that CEO Choi Young has and the political sensitivity surrounding the growth of the domestic casino market, the government has indicated Kangwon Land will only be allowed to apply for more gaming tables after building work is completed.

Although Kangwon Land is a state enterprise and must abide by the government’s wishes, it could certainly use more tables. The first quarter of 2010 produced the casino’s best ever result, with gross gaming revenue equivalent to US$282 million. Still, crowding and a sixyear-long freeze on the number of gaming tables permitted at the property are causing revenue growth to plateau. In the second quarter of 2010, gaming revenue slipped back to US$260 million—an 8.3% increase from Q2 2009, but only 3% up on Q4 2009.

Kangwon Land was originally conceived as a government initiative to rejuvenate Kangwon Province—a former coal production centre that became impoverished after the mines shut. The casino opened in March 2003 with 30 tables. Following 18 months of steady capacity expansion, the National Gaming Control Commission imposed a cap of 132 tables in November 2004 in line with government orders to limit the casino industry’s income.

Kangwon Land’s casino currently covers nearly 300,000 square feet and also offers 960 video slots that are upgraded regularly via a rolling acquisition programme. There has been much speculation over the past few years that the table cap would be lifted, but that has yet to happen. The possible expansion of the domestic gaming market in Jeju could take South Korea’s industry to a whole new level.

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